Aug. 15 (Bloomberg) -- Investors are piling into securities
that gain should equity volatility increase, a bearish bet on
stocks that was last popular when the Standard & Poor’s 500
Index climbed above 1,400 in March.

Outstanding shares jumped to a record for the three most-used exchange-traded securities that profit from volatility
gains in U.S. stocks, according to data compiled by Bloomberg.
The Chicago Board Options Exchange Volatility Index, known as
the VIX, dropped 1.5 percent to 14.63 today after reaching its
lowest level since June 2007 earlier this week.

Demand for protection against losses has increased after
more than $1.3 trillion has been added to American share values
since the S&P 500 reached a five-month low on June 1. Equity
volume reached the lowest level since 2008 excluding holidays
this week as vacationing traders awaited U.S. Federal Reserve
Chairman Ben S. Bernanke’s speech at the Kansas City conference
in Jackson Hole, Wyoming, and the European Central Bank meeting
next month.

“We are certainly in the summer doldrums -- both volume
and volatility have been extremely low,” Andrew Greeley, a
senior managing director at Stamford, Connecticut-based Acorn
Derivatives Management Corp., which manages more than $500
million in volatility assets, said in an interview yesterday.
“Many of the macro risks are still with us. We suspect that
volatility will move back up.”

Shares Outstanding

Shares outstanding for Barclays Plc’s iPath S&P 500 VIX
Short-Term Futures ETN, the most traded of the securities tied
to volatility, jumped sixfold this year to 142 million
yesterday, data compiled by Bloomberg show. The number of
ProShares Ultra VIX Short-Term Futures shares increased to
almost 50 million from 100,000 at the end of December, and the
VelocityShares Daily 2x VIX Short Term ETN soared to 80 million
from 5.1 million.

The securities track a gauge based on VIX futures.
Exchange-traded notes are unsecured bank debt backed by their
issuer’s credit, unlike exchange-traded funds that hold assets.
Banks create and redeem shares of ETNs based on the level of
demand for the securities. That demand generally doesn’t affect
the price since the ETNs track the performance of an index.

The U.S. economy cooled in the second quarter as limited
job growth prompted Americans to curb spending while state and
local governments cut back. In the euro region, expansion shrank
in the second quarter after the worsening debt crisis and
tougher budget cuts forced at least six nations into recessions.
China’s export growth collapsed in July and imports as well as
new yuan loans trailed estimates.

Global GDP

Global gross domestic product will increase 2.2 percent
this year, the slowest expansion since the 2009 contraction, the
median economist estimate in a Bloomberg survey shows.

The S&P 500’s rally since June has taken the benchmark
gauge for American equities close to its highest level since May
2008, amid speculation the Fed will add stimulus measures. The
VIX, which moves in the opposite direction of stock prices about
80 percent of the time, fell 44 percent since this year’s high
on June 1 and is 38 percent below its one-year average, data
compiled by Bloomberg show.

The Federal Open Market Committee on Aug. 1 reiterated its
pledge to ease policy further if necessary, and ECB President
Mario Draghi promised last month that policy makers will do
whatever is needed to preserve the euro. Bernanke’s speech at
the 2010 Jackson Hole conference set the stage for a second
round of large-scale asset purchases, which the committee
started in November that year. His presentation this year takes
place Aug. 31. The next Fed statement will be on Sept. 13, and
the ECB will give its rate decision on Sept. 6.

Bearish Options

The cost of bearish S&P 500 options has fallen to its
lowest level in 14 months relative to bullish contracts. Puts
that pay should the index drop 10 percent cost nine points more
than calls betting on a 10 percent rally, three-month implied
volatility data compiled by Bloomberg show. The price
relationship known as skew fell to 8.73 on July 18, its lowest
level since May 2011.

“A VIX below 15 is a nice headline and the market has seen
a pick-up in options activity because of it,” Scott Maidel, who
helps oversee $152 billion as a money manager for equity
derivatives at Russell Investments in Seattle, said yesterday in
an interview. “A lot of fund managers and hedge funds were
light on exposure and hedging the upside, therefore volatility
skew has come down.”

VIX Futures

VIX futures show traders are betting volatility won’t stay
this low. The six-month contracts reached their highest level
since March versus the volatility index on Aug. 13, data
compiled by Bloomberg show. At the same time, the number of
outstanding VIX calls to buy the gauge versus puts to sell
jumped to 2.08-to-1 on Aug. 10 after touching 2.2 on July 30, a
one-year high, according to the data.

“It’s summer and nobody wants to own volatility,” Peter
Cecchini, global head of institutional equity derivatives at New
York-based Cantor Fitzgerald LP, said in an Aug. 13 interview.
“The macroeconomic backdrop is completely divergent from the
VIX and that disconnect is likely to revert.”